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Below are the top mid-cap hospitals stocks on the NYSE and the NASDAQ in terms of EPS growth forecast for the next year.
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There are 6000+ hospitals in the United States. Some perform a broad range of medical procedures, from emergency rooms to surgery to diagnostic care. Others focus on a single medical specialty - for instance, MedCath (MDTH) focuses exclusively on cardiology, while Dynacq Healthcare (DYII) operates specialty surgical hospitals. All hospitals receive revenues from government programs Medicare and Medicaid, private insurers, and directly from uninsured patients. Hospital operators vary in size - Dynacq Healthcare (DYII) one of the smallest, runs only 3 hospitals, while the largest hospital operator in America, Community Health Systems (CYH), operates 116 facilities.

Though the hospital industry has traditionally been quite profitable, with many hospitals remaining virtual monopolies in their geographic areas, a host of new challenges has emerged over the past few years. The numbers of uninsured patients are growing, reaching 47 million in 2006;[1] historically, hospitals collect only 10% of total amounts billed to such patients.[2] Since hospitals are required by law to provide emergency care to all patients,[3] bad debt expense has been rising throughout the industry. Additionally, the strain put on the Medicare system by the swift increase in beneficiaries has caused Congress to consider cutting back on reimbursements to healthcare providers. Even hospitals' monopoly positions are threatened by new competition from independent and physician-owned surgical and diagnostic centers.[4]

Companies Involved

Health Management Associates (HMA) operates 59 hospitals in rural areas across the Southeastern United States. All of its hospitals provide basic services such as general surgery and diagnostic care, and some of its facilities also provide specialized services like cardiology and neurosurgery.[5] More than many of its peer firms, HMA has made an effort to form partnerships with physicians through joint ventures in order to better respond to competition from private clinics and physician-owned hospitals.[6]

Community Health Systems (CYH) owns and leases over a hundred hospitals in 28 states, primarily in rural communities. Revenues have grown at a compounded annual growth rate of 30% from 2003-2007, due largely to acquisitions, such as the 2007 purchase of Triad Hospitals Inc. which doubled the size of the CYH network in terms of beds, and made it the largest publicly traded hospital operator chain in the country.[7]

Universal Health Services (UHS) is the fifth largest for-profit hospital operator in America and the country's largest publicly-traded psychiatric and substance abuse facility operator.[8] Increased competition in the hospital industry and continuing expenses related to Hurricane Katrina have pressured margins in the company's hospital business from 2006-08,[9] but UHS has compensated for this with strong earnings in its behavioral health segment (24% of 2007 revenues but 49% of the company's net income that year[10]). This segment counteracts negative market trends in the hospital industry, allowing the firm to benefit from higher profit margins at psychiatric and substance abuse facilities (almost 20%, compared to about 7% in UHS's hospitals).[11]

Tenet Healthcare (THC) manages 59 hospitals in 12 states, mainly in urban and suburban areas; its facilities serve an above-industry-average number of senior citizens and insured patients. Over two-thirds of the firm's hospitals are located in California, Florida, and Texas, and demographic trends in these states have a substantial effect on the company's balance sheet.[12]

LifePoint Hospitals (LPNT) owns and operates 48 hospitals located throughout the United States, primarily in rural areas. The firm grows primarily through acquisitions, such as the 2005 merger with Province Healthcare, which doubled its size.[13] While revenues have risen steadily over the past five years, operating income has remained more volatile as numbers of uninsured patients seeking LifePoint's services increase and new competitors encroach upon its once-monopolistic markets.[14]

Dynacq Healthcare (DYII) operates surgical hospitals specializing in three high-margin medical specialties - orthopedics, neurosurgery and general surgery. The firm distinguishes itself from the competition through this narrow focus, as well as by giving its surgeons authority over equipment and staffing decisions and the option to obtain a minority interest in the hospital they work in. In addition to owning hospitals in Texas and Louisiana, Dynacq is currently involved in a joint venture to construct and operate a new hospital in Shanghai, China.[15]

MedCath (MDTH) operates nine hospitals, which, though licensed as general acute care hospitals, focus on cardiovascular disease. The firm also owns several diagnostic and therapeutic facilities, as well as mobile cardiac catheterization laboratories. MedCath has a heavy focus on partnering with cardiologists to deliver care in its facilities, allowing them autonomy to make operating decisions and minimizing bureaucracy and red tape. It hopes to benefit from rising demand for treatment for cardiovascular disease, already the #1 cause of death in the nation, as the population ages.[16]

SunLink Health Systems (SSY) is one of the smallest and youngest hospital operators, formed in 2000. The firm runs 7 community hospitals and nursing home/home care businesses in the Southeast and Midwest, as well as a specialty pharmacy business in Louisiana. All of its facilities are located in rural communities; the firm operates on a relatively decentralized basis, allowing its facilities to make autonomous decisions locally.[17]

Rehabcare Group (RHB) provides rehabilitation program management services to approximately 1,200 hospitals, nursing homes, and other long-term care facilities. The firm partners with these facilities to run all steps of rehabilitation programs, from medical direction to quality assurance to developing specialty programs. Rehabcare also operates three of its own long-term acute care hospitals and six rehabilitation hospitals. Finally, the firm provides healthcare services, including management consulting and staffing services for support personnel such as therapists and nurses.[18]

Key Trends, Risks, and Forces

Historically, the hospital industry has been characterized by low levels of competition, with most communities home to only a few hospitals. However, the number of new facilities for delivering hospital services, such as physician-run outpatient surgery centers, specialty hospitals, and diagnostic centers, has grown rapidly. For instance, in 2007, there were 4900 registered outpatient surgery centers[19], accounting for 31% of the 50 million surgeries performed each year.[20] As a result of this jump in supply, for-profit hospitals are left with an excess of beds and not enough patients.[21] Furthermore, because independent competitors frequently have lower costs due to their smaller size and simpler infrastructure, they can provide the same services at lower prices than traditional hospitals.[22] Because hospitals use the income provided by high-margin operations to finance certain unprofitable services and procedures, the increased competition can completely erase profits by eliminating these margins.[23]In fact, only 500-1000 of the nation's more than 6000 hospitals remain consistently profitable.[24]

A Rising Number of Uninsured Patients Increases Costs

The number of uninsured patients has been rising throughout the nation, growing nearly 5% in 2006 to reach 47 million.[25] Since all hospitals are legally required to provide emergency care to anyone who needs it, whether they are insured or not, they face high expenses (specifically bad debt expense) from this trend.[26] Historically, hospitals have collected only 10% of total amounts billed to uninsured patients.[27] While hospitals have attempted to combat these losses by charging uninsured patients more for procedures with hopes of thus recovering greater amounts, this strategy has not proved effective.[28]

A Shortage of Qualified Physicians and Nurses Makes it Harder to Attract Patients

In order to increase or even maintain the breadth of specialized services available to its patients, hospitals have to hire qualified physicians and nurses. This has become an industry-wide challenge as the nation faces a shortage in both professions.

American physicians are getting older - in the last twenty years, the percentage of doctors over 55 years old has risen from 27% to 34%, meaning that many of them will be retiring in the coming years.[29] At the same time, the number of first year medical students relative to the total population has been dropping for the past two decades, reaching 5.6 per 100,000 people in 2005.[30] The shortage is especially acute (20% or higher) in specialties including cardiology, family practice, general surgery, internal medicine, oncology, orthopedic surgery, psychiatry and urology.[31] In rural areas, where less than 10,000 of 212,000 physicians are surgeons, specialists are even more scarce.[29] Rural doctors generally receive smaller salaries than their urban counterparts, adding to the challenges faced by rural hospital chains in recruiting for many of their locations.[29] Hospitals have responded to the challenge by offering employees technologically advanced equipment and facilities, adequate support staff, relocation assistance, and other benefits.[32]

In 2007, approximately 116,000 nurses were needed to fill vacancies throughout the country, which means that 8.1% of nursing positions in the US are going unfilled.[33] The problem is unlikely to abate in the near future because nursing schools are not graduating enough students to meet demand, largely due to inadequate numbers of skilled faculty; more than 30,000 qualified applicants to nursing programs were turned away in 2007.[34] The shortage has eroded profitability in the hospital industry as salaries and benefits rise in order to recruit adequate numbers of personnel.[35]

The retirement of the baby boomers, who make up slightly over a quarter of America's population, has had an economic as well as demographic impact on the nation as a whole.[36] A rapid increase in the number of elderly Americans provides an opportunity for hospital owners, since people older than 65 generally need more medical care.[37] People 65 and over account for 40-50% of total spending on healthcare; the per capita healthcare spending in this age group is 3-5 times higher than for people under 65.[38] As a result, total healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion.[39] At the same time, the aging of the population will indirectly hurt the hospital industry through its effect on the Medicare system, which is becoming saturated as more baby boomers become eligible to participate. Medicare expenditures already comprised 5.3% of U.S. GDP in 2006[40] and existing reimbursement levels are not sustainable, suggesting that per-patient Medicare revenues for hospitals will decrease in the near future.[41]

Caps on Government Reimbursements for Medicare and Medicaid Patients Restrict Freedom to Raise Prices

The US government limits the amount that hospitals will be reimbursed for treating Medicare and Medicaid patients, putting a ceiling on the prices hospitals can charge for services it provides to such patients.[42] These limits have an especially significant effect on revenues because anywhere from 30% to over 40% of a typical hospital's patients are on Medicaid and Medicare.[43] As the number of patients using Medicare and Medicaid grows in future years, stretching federal resources, the government considering making changes to these programs to cap reimbursements further. For example, Medicare reimbursement rates were cut 10.6% on July 1, 2008; though the move was reversed two weeks later, the current rates have been for 2008, thus making it impossible for hospitals to raise prices.[44]

Market Share

The hospital industry is fragmented, with hundreds of providers of various sizes spread throughout the country. Competition is limited by geographic constraints (there are never more than a few hospitals in one geographic area). Community Health Systems (CYH) is the largest for-profit national hospital operator, accounting for about 2% of the market (the chart below breaks down the market share of national for-profit hospital operators by revenues). The firm also holds the largest market share by number of hospitals - its facilities account for 2% of the 6013 total hospitals in America. [45]